Napster was first released in the fall of 1999. It was the first of the massively popular peer-to-peer file sharing systems, although it was not perfectly peer-to-peer since it used central servers to maintain the lists of connected systems and the files they provided, while actual transactions were conducted directly between machines. This is in fact very similar to how instant messaging systems work. Although there were already relatively popular mediums which facilitated the sharing of files across the internet, such as IRC, Hotline, and USENET, Napster was the first to specialize exclusively in MP3s. The result was a system which featured a large selection of music to download. Almost immediately - in December 1999 - several major recording companies filed a class-action suit against Napster. This gave Napster a great deal of publicity, and millions of users flocked to the service. Napster use peaked with 13.6 million users in February 2001 (source: comScore Media Metrix).
Supporters of Napster were puzzled at the time regarding the lawsuit. To them it seemed that file sharing was a feature of the internet, and not Napster per se, Napster acting as essentially a search engine. Many argued any attempt to shut down napster would simply lead to people using a different medium to exchange files over the internet (as has arguably happened with peer-to-peer software like Audiogalaxy, Morpheus, Gnutella, and Kazaa). Similarly many supporters of Napster were concerned about the media's constant use of the word "site" to describe the service (when it was a program not a website), a word which seems to imply that Napster was distributing files itself rather then facilitating people sharing them.
In July 2001, a judge issued an injunction ordering Napster's servers shut down to prevent further copyright violations. On September 24, 2001, the case was partially settled. Napster agreed to pay music creators and copyright owners $26 million in settlement of damages for past, unauthorized uses of music, as well as an advance against future licensing royalties of $10 million. In order to pay those fees, Napster attempted to convert their free service to a subscription system. A prototype solution was tested in the spring of 2002, but was never made publicly available.
Pursuant to terms of that agreement, on June 3 Napster filed for Chapter 11 protection under United States bankruptcy laws. On September 2, 2002, an American bankruptcy judge blocked the sale to Bertelsman and forced Napster to liquidate its assets according to Chapter 7 of the U.S. bankruptcy laws. Most of the Napster staff was laid off, and the website changed to display "Napster was here".
In the time since Napster was shut down, several other peer-to-peer file sharing programs such as Morpheus and KaZaA have been released. These programs have overtaken Napster as the primary source for MP3 sharing fans to obtain the music they want. It is very likely that the death of Napster will only cause a temporary slowdown in the growth of file sharing according to file sharing optimists.
The central servers used by Napster made it a convenient legal target (although a program known as "Napigator" allows the Napster software to connect to any unofficial Napster server), as these clearly indicated the presence of illegal activity, thus making Napster guilty of negligence for not attempting to control the illegal activity. Other hybrid systems such as KaZaA and Audiogalaxy have also been hit by the industry, whereas true peer-to-peer systems such as Gnutella-based Morpheus and Limewire have proven much harder for the music industry to shut down.
Roxio Inc bought the assets of Napster at its bankruptcy auction in 2002, with the intention of using these assets as the basis of a new service that would let users access music through a subscription or on a fee-per-song basis. This service, dubbed "Napster 2.0", had a beta release in New York City on October 9, 2003, and went into full production on October 29. Napster 2.0 is not a peer-to-peer service and bears little resemblance to the original Napster save for the name and logo. It is one of several legal online music services to arise in the wake of the success of Apple Computer's iTunes Music Store service.
On Monday, October 27th, 2003, just 48 hours prior to the official launch of Napster 2.0, Napster posted a press release on their website stating that starting in November, people can buy Napster gift cards for $14.85 from Safeway, Rite Aid, CompUSA, Best Buy, and ExxonMobil. This card will have a scratch-off surface that will reveal a unique PIN number that can be used with Napster 2.0 to give 15 credits for permanent download of music from the Napster 2.0 service. In another press release Microsoft announced that its new Microsoft Windows XP Media Center Edition 2004 will feature the Napster 2.0 service. Earlier in October, Napster and Samsung revealed the first Samsung Napster Player, which is currently available at electronic stores throughout the U.S. The press release also claims that Napster 2.0 supports all the leading digital music players currently released on the market, though it does not support the Apple iPod.